Are you a homeowner struggling with more debt than you can pay? If so, you aren’t alone—especially today. In the wake of the COVID-19 pandemic, millions of people throughout the United States have lost their jobs, closed down their businesses, and become burdened with medical expenses. If you were struggling financially before the pandemic hit, this national emergency might have sent you over the edge.
It can be hard to predict whether any more financial relief may come from the government. However, one option remains available—and it helps hundreds of thousands of people every single year.
That option is bankruptcy, a legal process that can permanently wipe out many different types of debts. Contrary to popular belief, it is a fresh start that helps people get back on their feet. Many think that filing bankruptcy means you will have no choice but to surrender your property, but most bankruptcy filers can receive a debt discharge without losing anything they own!
That said, everyone’s case is unique, and Chapter 13 is a particularly complex process. Let’s take a close look at Chapter 13 bankruptcy and when it can—and cannot—help you keep your home.
The Chapter 13 Process
When you file Chapter 13 bankruptcy, you will organize your debt (under the court’s supervision) into a payment plan that will take 3-5 years to complete. Your monthly payments will go to the bankruptcy trustee, who will distribute these funds to your creditors and lenders by order of priority under the Bankruptcy Code.
Your income and assets will determine the size of your monthly payment. Fortunately, your plan will NOT need to cover all your debts.
If you complete the entire plan, the court can discharge any remaining dischargeable debts, such as:
- Credit card debt
- Medical debt
- Unpaid utility bills
- Unsecured personal loans (e.g. “payday loans”)
The court can also discharge your mortgage and auto loan debt. However,the discharge of secured debts (i.e. debts backed by collateral, such as your house for your mortgage) does NOT mean your lender can no longer seize the property if you are behind on payments. This is because, when you took out the mortgage, you gave your lender the contractual right to seize your home if you were to stop making payments.
Thus, people who want to file Chapter 13 and keep their home will need to reaffirm the debt AND catch up on any delinquent payments. If, by the end of your Chapter 13 case, you have caught up on all payments, you should be able to keep your home.
If you never fell behind on mortgage payments, however, there should be no risk of losing your home through Chapter 13 bankruptcy.
What if My Lender Wants to Foreclose on My Home?
All types of bankruptcy trigger a court order called the automatic stay. While the automatic stay is in effect (i.e. the entirety of the bankruptcy proceeding), creditors and lenders cannot pursue your debt in any way. In other words, foreclosure is off-limits. Depending on timing, bankruptcy can even stop a foreclosure that has already begun.
What if I File Chapter 7 Instead?
Chapter 7 is not a form of debt reorganization. Instead, the trustee will evaluate your assets to determine whether anything can be sold to repay your creditors. This process is called liquidation, but most people who file Chapter 7 can protect everything they own by claiming bankruptcy exemptions.
In California, the homestead exemption is about to massively increase. Currently, you might only be able to protect $50,000 in equity. If you own more than that, the trustee can sell your home, give you the $50,000, and send the rest of the proceeds to your lender and other creditors. Starting January of 2021, however, you will be able to protect anywhere from $300,000 to $600,000 in equity, depending on the median home value in your area.
But what if you had fallen behind on mortgage payments before filing Chapter 7 bankruptcy? Unfortunately, you will have less of a chance of keeping your home. Supposing you can shield all your equity from liquidation, you will also need to cure the default by the end of your case. Unlike Chapter 13, which takes 3-5 years, your Chapter 7 case will most likely take less than six months, and it does not involve a repayment plan.
In general, the way bankruptcy may affect your home ownership will depend on many factors, and you will benefit greatly if an experienced attorney provides an analysis of your situation.
Bring Your Financial Crisis to Our Dedicated Law Firm
Are you struggling to decide how to overcome your financial hardship? You likely have several options at your disposal, and our team at US Legal Group, APC is here to help you develop a fully personalized strategy. If bankruptcy is right for you, we can help you decide which chapter to file. We will then guide you through every step of the process, help you avoid common pitfalls, and show you how to maximize the benefits of your case.